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Insanity is doing the same thing over and over again and expecting different results.
Albert Einstein

For decades startups were managed by pretending the company would follow a predictable path (revenue plan, scale, etc.) and being continually surprised when it didn’t.

That’s the definition of insanity. Luckily most startups now realize there is a better way.

Startups Are Not Small Versions of Large CompaniesAs we described in previous posts, startups fail on the day they’re founded if they are organized and managed like they are a small version of a large company. In an existing company with existing customers you 1) understand the customers problem and 2) since you do, you can specify the entire feature set on day one. But startups aren’t large companies, but for decades VC’s insisted that startups organize and plan like they were.

These false assumptions – that you know the customer problem and product features – led startups to organize their product introduction process like the diagram below – essentially identical to the product management process of a large company. In fact, for decades if you drew this diagram on day one of a startup VC’s would nod sagely and everyone would get to work heading to first customer ship.

The Revenue Plan – The Third Fatal AssumptionNotice that the traditional product introduction model leads to a product launch and the execution of a revenue plan. The revenue numbers and revenue model came from a startups original Business Plan. A business plan has a set of assumptions (who’s the customer, what’s the price, what’s the channel, what are the product features that matter, etc.) that make up a business model. All of these initial assumptions must be right for the revenue plan to be correct. Yet by first customer ship most of the business model hasn’t been validated or tested. Yet startups following the traditional product introduction model are organized to execute the business plan as if it were fact.

Unless you were incredibly lucky most of your assumptions are wrong. What happens next is painful, predictable, avoidable, yet built into to every startup business plan.

Ritualized CrisesTrying to execute a startup revenue plan is why crises unfold in a stylized, predicable ritual after first customer ship.

You can almost set your watch to six months or so after first customer ship, when Sales starts missing its “numbers,” the board gets concerned and Marketing tries to “make up a better story.” The web site and/or product presentation slides start changing and Marketing and Sales try different customers, different channels, new pricing, etc. Having failed to deliver the promised revenue, the VP of Sales in a startup who does not make the “numbers” becomes an ex-VP of Sales. (The half-life of the first VP of sales of a startup is ~18 months.)

Now the company is in crisis mode because the rest of the organization (product development, marketing, etc.) has based its headcount and expenses on the business plan, expecting Sales to make its numbers. Without the revenue to match its expenses, the company is in now danger of running out of money.

Pivots By Firing ExecutivesA new VP of Sales (then VP of Marketing, then CEO) looks at their predecessors’ strategy, and if they are smart, they do something different (they implement a different pricing model, pick a new sales channel, target different customers and/or partners, reformulate the product features, etc.)

Surprisingly we have never explicitly articulated or understood that what’s really happening when we hire a new VP or CEO in a startup is that the newly hired executive is implicitly pivoting (radically changing) some portion of the business model. We were changing the business model when we changed executives.

Each of the 9 business model building blocks has a set of hypotheses that need to be tested. The Customer Development process is then used to test each of the 9 building blocks of the business model. Each block in the business model canvas maps to hypotheses in the Customer Discovery and Validation steps of Customer Development.

Simultaneously the engineering team is using an Agile Development methodology to iteratively and incrementally build the Minimum Feature Set to test the product or service that make up the Value Proposition.

Pivots Versus CrisesIf we accept that startups are engaged in the search for a business model, we recognize that radical shifts in a startups business model are the norm, rather than the exception.

This means that instead of firing an executive every time we discover a faulty hypothesis, we expect it as a normal course of business.

Why it’s not a crisis is that the Customer Development process says, “do not staff and hire like you are executing. Instead keep the burn rate low during Customer Discovery and Validation while you are searching for a business model.” This low burn rate allows you to take several swings at the bat (or shots on the goal, depending on your country.) Each pivot gets you smarter but doesn’t put you out of business. And when you finally find a scalable and repeatable model, you exit Customer Validation, pour on the cash and scale the company.

Lessons Learned

“I know the Customer problem” and “I know the features to build” are rarely true on day one in a startup

These hypotheses lead to a revenue plan that is untested, yet becomes the plan of record.

Revenue shortfalls are the norm in a startup yet they create a crisis.

The traditional solution to a startup crisis is to remove executives. Their replacements implicitly iterate the business model.

The alternative to firing and crises is the Business Model/Customer Development process.

It says faulty hypotheses are a normal part of a startup

We keep the burn rate low while we search and pivot allowing for multiple iterations of the business model.

11 Responses

How many times do you have to hit us over the head until we get it? :) I get it, and we’re doing it. BTW, thanks for selling your book on amazon at a rate students can afford, a great way to get more people involved in the concept.

I wrote something yesterday that aligns with this. Many of the emerging companies I work with start implementing business process automation tools prior to verifying what the processes should be and which of these make sense to automate. The end result is that they end up making a bad situation worse by accelerating a process that is irrelevant. The title of the post is “A Fool With a Tool is Still a Fool” and may be found here: http://bit.ly/aVyGrM.

I’ve often been the first ‘customer facing employee’ and have often been asked, “how much can you sell in the first year?” My response has often been, “what can you ship in the first year?” Virtually every time the company has missed its product plan and the result has been poor sales. And indeed, the cycle of VP of Sales, and VP of Marketing began. Often the CEO ended up in some nebulous position such as “VP of Special Projects” and was soon out the door…

[…] For the simple reason that their mentors (James Surowiecki, Robin Hanson and Justin Wolfers) had the wrong hypothesis. It turned out that prediction markets are useful in business administration. Period. End of chapter. Move on. […]

I run a retail concept (2 years old, 5 stores) in India and am a regular reader of the blog. The examples and terminology used here often relate to tech startups in a developed economy – however I find that a lot of what is said resonates with a non-tech startup in the developing world as well.

From an entrepreneur’s perspective heres why your blog is great:

1. BS Filter: There is a ton of advice floating around on what startups should do – The conceptual framework you discuss here really brings a method to the startup madness.

2. Getting the Difference: Accepting and knowing that startups are not small corporations, stops us from mindlessly aping the wrong things: flashy offices, big advertising budgets etc

3. Motivates: Realizing that you aren’t repeatedly failing, you are just experimenting helps you keep going.

3. And the relief :) It finally allows the startup entrepreneur to get off that roller coaster of self-doubt. (That first store I opened was MEANT to fail!)

The only piece of feedback I have is that these concepts are much bigger than just a tech startup, and I think some of the terminology used (engineering team, minimum feature set etc) is a bit domain specific.

One of the challenges I face is balancing the revenue generating part of the startup (my existing stores) with the customer discovery process. In a perfect world it would be great to have the funding to concentrate just on customer discovery, but the reality is that the sub-optimal first attempts are funding the discovery process. What makes it tougher is that same resource has to be used both in the day to day execution of the business as well as the customer discovery process, resulting in conflict at many levels.

Apologies for using this method to contact you but I do not have your direct e-mail address. I am semiconductor curator for the upcoming exhibit at the Computer History Museum and have been following your “Secret History Series” since hearing your talk a while back. I also write on high-tech history related-topics.

Last month Sutro Media published my iPhone/iPad app “Silicon Valley Roots & Shoots”, a tour guide to high tech heritage sites in the region. The current version has very few military related entries (EIMAC, Lockheed, Litton, Mt. Umunhum, & Onizuka AFB). I would like to include a few more in the next rev due in early 2011. Do you have recommendations of additional places where the general public can see (maybe from a distance or through barbed wire) some physical artifact – building, exhibit, or plaque – that holds a Cold War tech story?

I wish to add the expected burn rate as well. By the time the business receives money the dynamic has changed but the accounts insist on burning money, as per the business plan. It just does not make sense when the dynamic of a small business is so different to a corporate.

Another 2 pet peeves in this space is inventory capital, and replacing small business investments.
The small business has put everything on the line and needs a bit of slack which is never give.

The other is the capital required for inventory, which is seldom financed, causing the business cash flow troubles and usually hamstrings them to meeting orders.

[…] started to incorporate several of these lessons into my venture development classes. Crisis Management by Firing Executives – There’s A Better Way OK, it’s not really about firing executives but a continuation of the above post. Thus it is […]

Steve,
I recently discovered your blog and I’m glad that I did. Your ideas and messages deeply resonate with me. I’ve found your four stage-Customer Development methodology to be the most comprehensive and realistic process for developing a (scalable) startup.

Given my long-standing interest in collaborative ideas management, Value Innovation, and Kim & Mauborgne’s Blue Ocean Strategy, I have sought to integrate Value Innovation/Blue Ocean Strategy with your Customer Development methodology using a visual collaboration framework. The result is featured in a presentation, “The Customer Development Roadmap for Blue Ocean Strategists.” I’m focusing on the application of Customer Development (Roadmap) to scalable startups that are in non-software sectors.